Adjustable Rate Mortgage - Are the Risks Worth the Savings

by Louie Latour - Date: 2006-12-06 - Word Count: 433 Share This!

If you are considering using an Adjustable Rate Mortgage to refinance your existing mortgage you need to understand the risk associated with this type of loan before signing up. Here are several tips to help you decide if mortgage refinancing with an Adjustable Rate Mortgage is right for you.

Adjustable Rate Mortgages can save you a lot of money if used correctly. Many homeowners rely on Adjustable Rate Mortgages to purchase their homes because of lower payments and the ease of qualifying. Many of these homeowners get into trouble because they do not fully understand how their Adjustable Rate Mortgages work and cannot afford the payments when their lender resets the loan. Here are the basics to help you understand how Adjustable Rate Mortgages work and the potential pitfalls you could encounter.

Adjustable Rate Mortgages are simply mortgage loans with a variable interest rate that changes periodically at an interval specified in your loan contract. Your Adjustable Rate Mortgage is tied to some financial index, like the prime interest rate for example, and the lender resets the loan to this index and adds their markup at regular intervals. This adjustment period usually takes place every year on your loan's anniversary date. When the lender adjusts your interest rate your monthly payment amount change depending on the direction interest rates have been going.

Adjustable Rate Mortgages come in several different flavors with varying degrees of risk. You can choose an interest only or payment option loan; these loans have significantly more risk than a standard Adjustable Rate Mortgage. Here are some of the advantages and risks associated with Adjustable Rate Mortgages.

Adjustable Rate Mortgage Interest Rate Fluctuation

Choosing an Adjustable Rate Mortgage allows you to take advantage of lower payments when interest rates go down. Falling interest rates can result in significant savings for savvy homeowners; however, rising interest rates result in rising payments. Mortgage interest rates are nearly impossible to predict; if you have a low tolerance for financial risk Adjustable Rate Mortgages are not the loan for you.

Adjustable Rate Mortgages: Introductory Interest Rates

Adjustable Rate Mortgages typically come with introductory rates that are significantly lower than the actual interest rate. During the introductory period your monthly payment amount will be significantly lower; if you need short-term financing this introductory period could save you a lot of money. Many homeowners fail to understand that this lower payment is not their actual payment amount and are shocked to see their payment go up significantly when the lender resets the loan.

You can learn more about your mortgage refinancing options including costly mistakes to avoid by registering for a free mortgage tutorial.

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